Does a Loan Settlement Ruin your CIBIL Credit Score?

As your CIBIL credit score is one of the most important factors that define your financial health, you must know what ruins it and what builds it up. It is always advised that if you have a loan or any form of debt, you must repay it on time and in full to avoid ruining your CIBIL credit score. Lets find out if a loan settlement can ruin your CIBIL credit score and what to do if you have already opted for a loan settlement.

Often people make the mistake of assuming “loan settlement” with “loan closure”. Both the labels are different. And both have some influence on your CIBIL credit score. All your payment related activities are shared by the lenders or financial institutions to CIBIL for updation and accordingly your credit score is calculated. Remember, your CIBIL credit score is not fixed and it changes from time to time as per your financial behavior. 

Let us start by understanding more about a loan settlement in detail. 

What is a Loan Settlement?

Borrowers who are in a bind may opt to settle their loans. The reason for loan settlement may be an illness, an accident, a loss of employment, or any other genuine circumstances. In such situations, you let the lender know about your predicament and ask for some time before you start making payments. Or you may want to ask the lender to “settle down” the loan.

The lender can offer you a one-time settlement option in which you and the lender will come to a common agreement on the debt that you have. The settlement amount is always less than the entire amount of unpaid debt you have. The status of this loan will be listed in the credit report as "settled". 

Loan Settlement and Impact on CIBIL Credit Score

For many borrowers, the effect of loan settlement on their CIBIL score ruins their chances of getting loans at competitive interest rates, getting a credit card with a desired limit. The vast majority of borrowers are completely unaware of the potential harm that a loan settlement could do to their credit score. If you decide to settle your debt, you should anticipate future negative effects on your CIBIL credit score. It's not unusual for your credit score to suffer if you have a "settled debt."

The status of a settled debt stays on the CIBIL credit report for as long as 7 years. During these 7 years, whenever you will apply for a new loan, credit card, or any other form of debt, the lender will consider the “loan settlement” status to make their decision. It may reflect that you were unable to repay the debt and that may lead to unfavorable results for your loan application. 

What can be Done to Remove Loan Settlement Status from the CIBIL Credit Report?

First of all, avoid a loan settlement at any cost. If you are in a genuine problem, talk to your lender. They may agree to give you a payment break or holiday. That means you may get sometime from making the repayments. Post that period, you will have to start making the payments. This is completely dependent on the lender, hence, convey your problems to the lender before you consider going for a “loan settlement”. 

If you already have opted for a “loan settlement”, your CIBIL credit score will go for a toss. You may also face issues while getting any new type of credit with a ruined CIBIL credit score. If you wish to remove the status of loan settlement from your CIBIL credit report, talk to your lender and pay off the unpaid debt. Ask your lender to give you a “No Dues Certificate”. Once you pay off the balance debt, the lender will report it to the credit bureaus and your CIBIL credit score will improve. 

Lenders and banks may refuse to provide you with a loan if the CIBI credit score indicates that the debt has not been paid. Keep in mind that debt settlement is not a solution. Banks and lenders offer you a settlement because they know you won't be able to pay back the money, so they agree to accept whatever you can afford to somehow manage the loss at hand. It is always wise to keep your borrowing within your means and make sure you have a backup plan for paying back the loan. The settled status of your loan will remain on your CIBIL credit report for the following seven years, so keep that in mind as well.